Monday, October 21, 2013

Former SEC Chair and Commissioners Urge Supreme Court to Reject Broad Reading of SOX Whistleblower Provision

Former SEC Chair Chris Cox and Commissioners Joseph Grundfest, Paul Atkins and Charles Cox have filed an amicus brief urging the Supreme Court to not adopt a strained and overly broad reading of the whistleblower provision of the Sarbanes-Oxley Act when Congress has already acted in the Dodd-Frank Act to extend whistleblower protections to private company employees. The former SEC officials asked the Court to affirm the decision of a First Circuit panel holding that only the employees of defined public companies are covered by the whistleblower provisions. Citing principles of statutory construction, the appeals panel concluded that Section 806 of Sarbanes-Oxley limits its whistleblower protections to employees of public companies. If Congress intended a broader meaning, said the panel, it could amend the statute. The Court granted certiorari on May 20, 2013, to review the First Circuit panel ruling. Oral argument in the case is set for November 12, 2013. (Lawson v. FMR, LLC, Dkt. No. 12-3).

In an earlier joint amicus brief, the SEC and Department of Labor urged the Supreme Court to rule that employees of contractors and subcontractors of public companies are protected from retaliation under the whistleblower provisions of the Sarbanes-Oxley Act when they report fraud or a violation of SEC rules.

But former SEC Chairman Cox and the SEC Commissioners argued that the whistleblower provision of Section 922 of the Dodd-Frank Act, and the SEC’s implementing regulations, alleviate the concern raised by the Petitioners that the First Circuit’s decision creates a gap in whistleblower protections. Although Congress plainly intended that violations be reported to the federal agency with primary expertise, noted the brief, Section 922 does not deter employees who opt to report violations internally at their companies.

To the contrary, Dodd-Frank allows potential whistleblowers to utilize an employer’s internal audit and reporting structures, if any, prior to providing information about securities law violations to the SEC. Acting pursuant to the authority delegated to it by Congress, the SEC has adopted rules permitting employees to first report alleged violations internally without waiving their eligibility for Dodd-Frank’s whistleblower reward program. In fact, continued the former officials, the SEC has recognized that a whistleblower’s attempt to report violations internally, prior to reporting to the SEC, may support the enhancement of a subsequent whistleblower award. Further, the enhanced protections in Section 922 include potential damages in the form of double back pay, direct access to federal courts following an alleged retaliatory act, and a longer statute of limitations.

Congress has thus already significantly expanded the federal anti-retaliation protections for employees reporting securities law violations, argued amici, thereby rendering unnecessary the expansive extra-textual reading of Section 806 being urged by the Petitioners. Congress purposely designed Dodd-Frank Section 922’s whistleblower reward program and its anti-retaliation protections so that reports of potential securities law violations would be channeled to the SEC, contended the former officials, the regulatory agency best positioned to investigate potential violations of the securities laws.

Thus, the brief concluded that the policy argument of Petitioners advocates a reading of Sarbanes-Oxley Section 806 that is inconsistent with its plain language by arguing that private company employees will otherwise be unprotected from retaliation for reporting alleged violations of the securities laws. This policy argument is moot because with the passage of Dodd-Frank, Congres expanded federal anti-retaliation coverage to private company employees.